O43 - Institutions and GrowthReturn

Africa is endowed with both natural resources and a young growing workforce. In light of this, it is obvious that regulations on labour markets will have significant impacts on economic growth, especially through effects on employment and productivity. This study provides information on labour market regulations (labour market flexibility) and their impacts on economic growth in Africa. In particular, this study examines the impact of labour market flexibility (regulations) on economic growth (real GDP per capita growth) relying on the Driscoll-Kraay fixed-effects estimator and the two-step system generalized method of moments (GMM) estimation techniques using data from 2000 to 2019 for 37 African countries. The results show a positive correlation, indicating that liberalizing rigid labour market regulations can lead to economic growth benefits. Specifically, it is observed that economic growth increases by approximately 0.16% resulting from a unit (one standard deviation) increase in labour market flexibility. The study also finds that economic growth (real GDP per capita growth) is high in countries that have flexible hour regulations, flexible mandatory costs of worker dismissal, and the absence of (or not strictly enforced) military conscription. These findings have important implications for African governments and policymakers as they may find it useful to liberalize the prevailing rigid labour market regulations to reap economic growth benefits.

This paper provides empirical evidence in support of the view that quality of institutions is an important determinant of medium and long-term growth in OECD countries. Regarding the methodology, a panel data analysis with two-stage least squares (2SLS) estimation will be used to account for the endogeneity of the institutional variable. Besides institutional quality, we also consider other relevant determinants of potential growth such as the initial level of GDP per capita, public debt, and structural variables typically referred to in economic growth theory. Our estimation results show a positive impact of institutions on subsequent economic growth: an increase in 1 point in institutional quality leads to an estimated increase of 16.88 percentage points in potential GDP per capita growth, in the case of high-debt countries. With this, we notice a particular rel- evance of institutions in countries with high levels of debt. Therefore, our findings support the necessary attention to the institutional tissue of societies since improvements in institutional quality can subsequently improve economic growth.

Mancur Olson wrote his influential study Big Bills Left on the Sidewalk: Why Some Countries are Rich, and Others Poor in 1996. In his paper, Olson claimed that the differ-ences in economic development between countries are caused by only two factors: institutions and policies on the one hand and culture on the other. We attempt to test his conjecture using econometric modelling, combining and comparing it with a broadly defined orthodox production function in an indirect neoclassical notation (Solow-Minhas-Arrow-Chenery's SMAC framework). The "pseudo-production function" obtained is econometrically sound and of explanatory power similar to models including economic variables, although we find strong evidence of interdependence between capital-labour share and institutions and policies and culture. We consider the test, performed on panel data from 154 countries over five-year averages from 1980-2014, to be robust and consistent with Olson's ideas.